Should Sports Teams Receive Tax Breaks?

In a very general sense, the question of tax breaks for sports teams falls under the category of whether or not subsidies are desirable. From an economic perspective on subsidies, some could say that almost all of them create suboptimal outcomes. This is because under normal market conditions market forces move automatically towards allocative efficiency. Subsidies distort the ability of markets to correctly allocate resources because they provide an incentive to continue the subsidized behavior, even when it is not profitable or productive to do so.

Why Subsidies Are UsefulThe counterargument is that subsidies are useful for this very reason. They allow government to shape economic outcomes toward desired policy objectives. For example, the money used to fund alternative energy sources. So although the subsidy is creating a less than optimal use of resources, people believe that is balanced by the development of technology that might not have otherwise been built until much later, if at all. Another reason people champion subsidies is to protect jobs or create growth. However, the job market is subject to the same economic forces as any other. By creating subsidies in unproductive industries people remain in jobs that are also unproductive; this makes society worse off. In the case of sports teams, the most commonly cited reason for subsidies is that it creates jobs and improves revenues. Yet there have been studies that conclude that this is not always the case.

Not All Need Tax BreaksMost sports teams are actually quite profitable and do not actually require tax breaks to remain competitive. Examples of the types of subsidies sports teams regularly enjoy include: tax-deductible ticket sales (including on luxury suites), reduction of taxes on revenue via direct tax credits and sweet-heart deals on new facilities. What this means is that corporations, and even individuals, can deduct a portion of what they spend on tickets in a similar manner as donating to a charity. In the case of new stadiums, the burden of building and operating arenas gets pushed onto the taxpayer while owners reap the related revenues. Unfortunately, due to the secretive nature of professional teams, most financial information is inaccessible thus preventing the public from accurately gauging the level of financial support these franchises receive.

However, let us be fair and consider the case where sports teams are legitimately struggling and only government aid can keep them afloat. This hearkens back to the beginning of this piece and the discussion on whether or not it is believed that subsidies are useful. Insofar as civic pride is concerned, maybe it is considered appropriate to prop up a flailing team. People have an emotional connection to their sports teams. They buy tickets to games, purchase merchandise and follow every story about their chosen champions. Despite this, only a very small portion of the population (20%) thinks that tax breaks for sports teams is good policy.

The intuition for this is that if a sports team is failing it is because it is poorly run and is spending itself into a hole, or the fans do not support it with enough revenue to continue. Either way, this is not an enterprise that should be having public money thrown at it. Perhaps the largest segment of government support goes toward the construction of stadiums. Fancy new stadiums attract fans and sports teams alike.

Cities often will use the promise of a new stadium to entice teams to relocate. Is this a good investment on behalf of the public? Almost all economists and independent development specialists conclude that the rate of return on these projects is less than what could be had on alternative projects, with some sports contracts failing significantly. Further, those cities that invested heavily in sports stadiums have experienced, on average, slower income growth compared to their peers who chose otherwise.

The Bottom LineThere is no silver lining. The public does not support deluxe treatments for sports teams in the form of tax breaks, the data does not support tax breaks for sports teams and commonly accepted economic theory does not support tax breaks for sports teams either. This leaves fans and citizens paying double as both their taxes and discretionary income go towards profitable franchises instead of schools and roads. The only people who benefit from such activity are those who own, operate and work for sports franchises. As Norman Braman, former owner of the NFL's Philadelphia Eagles, put it: "the taxpayers are a bunch of suckers."